Serbia Can Become the Balkan Tiger

August 12, 2010

Loup Brefort, Country Manager for Serbia, The World Bank

This article was published in NIN weekly magazine on August 12, 2010
Author: Loup Brefort, Country Manager for Serbia, The World Bank

My first impressions of Belgrade – I arrived just over a month ago – are of a city anchored in multiple layers of history, but at the same time running into the future. The question many people must ask themselves, though, is: will this future bring a better life?

Serbia definitely has plenty of opportunities to improve the lives of its citizens but for that most everyone, I would think, recognize that further change is needed. To those that feel pessimistic about the possibility, and the benefits of change, I would like to offer the example of Ireland. Citizens of the “Celtic Tiger” saw their income triple in the space of a decade (1985-1995) and triple again in the next (1995-2005). In 1960, Ireland’s GDP per capita was around $1,000; in 20008, over $60,000. If Ireland did it, surely Serbia can!

From long the poorest country of Western Europe still struggling with modernity in the 60s and 70s, Ireland transformed itself into a vibrant, wealthy, attractive and confident country.
There is a general consensus that the key to interpreting the Irish case can be found in connecting between economic, institutional and political transformation. Ireland’s change combined adoption of an outward oriented industrial strategy; improvements in human capital and infrastructure; competition, market liberalization and regulatory reform; macroeconomic stabilization; and improvements in governance.

The Irish developed a new strategy positioning the country as an export-driven production hub for high-tech exports. EU membership also helped. But many other countries tried this recipe and yet their achievements were nothing like that of the Irish. So, what is it that Ireland did in a different way? 

First, Policy-makers were convinced that Ireland’s future competitiveness would be more dependent on intellectual, rather than physical, capital. Significant investments were made to develop an education system geared to the needs of the economy and, by the 1990s; the availability of a skilled and flexible labour force had become at least as important an attraction for FDI into Ireland as the low corporate tax rates and other direct incentives.  Compared with the other EU ‘cohesion countries – Spain, Portugal and Greece – Ireland spent a smaller proportion of the EU funds to finance physical infrastructure and a greater proportion on education and training. This provided a smaller short-term demand stimulus to the economy, but yielded long-term benefits. 

The second important trait of Irish success was improvement in governance. The fact that Ireland developed a high quality civil service where people are employed on merit played a very significant role. This helped insulate civil servants from politicization and corruption. Its small size also helped maintain a light but nonetheless very effective business and consumer friendly regulatory environment.  Ireland ranks 7th out of 183 countries in the World Bank Group’s “Ease of Doing Business” indicator for 2010. In addition, Ireland applied ex ante cost-benefit analysis, multi-annual budgeting and ex-post evaluation in its public finances very transparently. The result was optimal investment in clear priorities. 

The last but not least distinguished feature of the Irish economic reforms was that they were designed and conducted in the framework of social partnership  based on the work done by National and Economic Council (NESC), an advisory body comprised of government officials, business people, unions, farmers, and community representatives. In 1986, the NESC produced a four year development strategy, which provided a foundation for negotiations and achievement of a broad consensus with business and labor on a package of reforms critical to restoring macro-economic stability that included wage restraint, tax reductions, public sector job cuts, and the maintenance of a certain social benefits.  The success of the partnership was such that negotiations have been repeated in three year intervals, between 1990 and 2006.

Ireland has been hard hit by the financial and economic crisis. Maybe too much success leads one to lower one’s guard and irrational exuberance then prevails over the laws of economics? Nevertheless I am sure Ireland will bounce back since its economy rests on very solid foundations.

Policy makers in Serbia opted to implement some of the elements of the Irish model. Yet, it is not the parts but the whole which made a difference. As for the courage and the will to implement the package I am sure the people and political elite in Serbia will find both.